Making Cents: U.S. one year after loss of AAA rating
Aug. 5 will mark the first anniversary of when the USA lost its AAA credit rating, reserved for the most creditworthy borrowers, from Standard and Poor's. Of course, at that time many investors thought that the sky was falling, and that it may be time to duck for cover.
On that day, the yield on the U.S. 10-year Treasury was 2.56 percent.
Nearly everyone expected that rate to rise as a drop in the country's credit rating must surely be accompanied by higher borrowing costs. But the reality is that through last week, yields have dropped somewhere just south of 1.5 percent.
There are reasons why this may have happened, although no one really can explain it exactly. The U.S. may have performed well because it looked less sick than some of our overseas counterparts. At the same time that the U.S. was facing its credit downgrade, Europe was starting to melt down, China and emerging market countries were beginning to cool down and major currencies around the globe began to weaken when compared to the U.S. dollar.
Still there is a fair amount of foreign capital reaching U.S. shores.
Despite record low yields, foreign investors are attracted to what still appears to be the foreign currency reserve of choice, the U.S. dollar.
Foreign investors are voting to accept low to no nominal yield in exchange for the comfort and hopeful stability of the U.S. dollar. Of course, sitting here in the U.S., we don't feel so stable. Unemployment still rages, business growth is anemic, the fiscal cliff of Bush tax cuts, estate tax changes and the healthcare tax is pending. This all leads to a lack of confidence among individual investors.
There are a few takeaways from this scenario. First is that diversification is not dead. Contrary to what many think, there's no reason to avoid the stock market; investors who had some allocation to U.S. stocks over the past 12 months have generally performed OK.
Second is that the future of any market performance is not just based on today's reality, but also the unknown of the future. This is perhaps another reason why one may be inclined to invest in an asset class that is out of favor and being avoided by the public at large.
John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at email@example.com or on Facebook as JohnPNapolitano.